New BERG Working Paper No. 187 of Sarah Mignot, Fabio Tramontana and Frank Westerhoff published

In the BERG Working Paper Series 187 Sarah Mignot, Fabio Tramontana and Frank Westerhoff have published a new paper entitled "Complex dynamics in a nonlinear duopoly model with heuristic expectation formation and learning behaviour".

A complete overview of all BERG Working Papers published so far can be found here.

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Abstract:

We develop a nonlinear duopoly model in which the heuristic expectation formation and learning behavior of two boundedly rational firms may engender complex dynamics. Most importantly, we assume that the firms employ different forecasting models to predict the behavior of their opponent. Moreover, the firms learn by leaning more strongly on forecasting models that yield more precise predictions. An eight-dimensional nonlinear map drives the dynamics of our approach. We analytically derive the conditions under which its unique steady state is locally stable and numerically study its out-of-equilibrium behavior. In doing so, we detect multiple scenarios with coexisting attractors at which the firms’ behavior yields distinctively different market outcomes.